Last week’s news that construction giant, Carillion, has gone into compulsory liquidation has sent shockwaves across the country. Many sub-contractors have now been left in a very precarious position with the risk of not being paid. Although it was announced on Wednesday that The Insolvency Service has pledged to keep paying 90% of Carillion’s UK staff employed on private sector contracts – around 8,500 people – work has paused on construction sites until formal decisions have been made. The TUC has also stepped in to try and protect smaller firms who are suffering losses. It is thought that 30,000 small companies will be affected by Carillion’s collapse. They also maintained 50 prisons and 50,000 homes for military personnel.

Why did the Carillion collapse happen?

One of the most controversial findings is the fact that Carillion were in talks with the government late last year. Major financial problems were highlighted including debt and problematic contracts, and a formal request was made for government support.

Despite being the second largest construction company in the country, Carillion had three profit warnings last year, and share prices fell from 192p to just 14p. Carillion had spiralling debts of £900m and a pension deficit of £580m, and reported only having £29m in cash before its recent collapse. The Federation of Small Businesses complained that many of their suppliers had to wait 120 days to be paid instead of the usual 60-day payment period.

Carillion also had increasingly complex finance arrangements, seeking less traditional sources outside of mainstream banks and lenders, which is a clear sign that the company was struggling.

Short-selling was another major factor – because hedge fund managers spotted potential problems, they were shorting Carillion shares. This is where shares are borrowed from other investors in return for a fee, and are then sold in the belief they will be able to buy the shares back cheaper in the future. When short-selling works, a profit is made, and the shares go back to the original investor. However, when a company collapses such as Carillion, the shares become almost worthless and unattractive to investors.

What can I do to protect my own business?

If you are one of the many sub-contractors affected by the Carillion collapse, and you are worried about your company finances, speak to your accountant or seek professional financial advice. There may be options available to secure the financial integrity of your company without having to resort to laying people off or liquidation.

If you are a Business Owner or a Director-Shareholder, we strongly advise you to carry out a full review of your business – both financially and operationally – and create a robust financial plan to minimise future risk. With major players like Carillion going bankrupt, you don’t want to find yourself in a similar predicament.

Ask yourself the following questions:

• Are you reliant on one or two major contracts?

If so, how confident are you in terms of your client’s financial buoyancy and their ability to be able to pay you?

• How reliant are you on your suppliers?

If you have one main supplier who is integral to your business operations, how confident are you in terms of their financial integrity?

• Do you have any protection in place for your Directors and employees?

It might be worthwhile investigating income protection insurance, and this could even form part of your employee benefits package. Don’t wait until a major restructure signals redundancy measures, as it will be too late by that stage and insurers are unlikely to payout. Speak to one of our team about Protection, whether it’s for yourself or for your business. We can help put in place Life, Critical Illness, Shareholder and Key Person insurance as part of our holistic financial planning service.

• How much debt do you owe?

If you owe a considerable amount of money, discuss repayment options with your accountant. You could consider other sources of finance, but always fully research funding sources, as complex financing can be risky – this was a key issue for Carillion.

• How much cash do you have in your business?

Having a healthy cash flow is vital for any size of business. If you are having cash flow problems, talk to your accountant before making any major decisions. If you are not happy with your accountant, we can signpost you to the trusted accountancy firms we work with – please contact us for more details.

If you are worried by the Carillion crisis, and you’re interested in creating a robust personal financial plan, please get in touch to speak to one of our team. Our financial planners will carry out a full review of your personal situation, including your business, and will provide expert advice to protect your interests.